[August 02, 2011]

Fitch Affirms Austin Community College District, Texas' Ltd Tax Bonds at 'AA+'; Outlook Stable

As part of its continuous surveillance efforts, Fitch Ratings affirms Austin Community College District, Texas' (ACC or the district) outstanding limited tax bonds as follows:

--$90.8 million limited tax bonds, series 2003, 2004 and 2006, at 'AA+'.

The Rating Outlook is Stable.

KEY RATING DRIVERS:

--The district's financial position remains sound due largely to its diversified revenue sources and solid reserves, although enrollment growth pressures have stretched recent financial performance.

--ACC benefits from its location in the large Austin-Round Rock metropolitan statistical area (MSA) economy and employment base.

--The district's tax base is substantial and generally diverse with recent expansion through successful annexation elections. Historically solid annual tax base gains reversed course modestly in fiscal 2011.

--Recent enrollment growth trends have been strong and are projected to continue over the near term. Area population trends exceed the state; income/wealth levels modestly exceed national averages.

--While overall debt levels are moderately high, ACC's direct debt ratios are low, given the substantial value of its tax base. Principal amortization of tax-supported debt is slow. Fitch expects direct debt levels to remain modest despite the facilities required for newly annexed areas that will drive much of the district's near-term capital needs.

--ACC maintains financial flexibility in its ability to raise tuition and fees, but is constrained in raising further operating tax revenue from its levy as it currently taxes at the voter-approved local limit.

WHAT COULD TRIGGER A RATING ACTION:

--Failure to manage expenditures and maintain its financial position in light of operating tax rate constraints and projected operating and capital growth pressures.

SECURITY:

The bonds are secured by an ad valorem tax levied on all taxable property within the district, limited to up to $0.50 per $100 of taxable assessed valuation (TAV).

CREDIT PROFILE:

ACC encompasses a sizeable population base of about 1.7 million in the large Austin-Round Rock-San Marcos MSA. The district operates eight comprehensive campuses in its taxing jurisdiction and offers instructional programs at its educational centers throughout its larger, eight-county service area. Over the past decade, area population growth trends have been fast-paced (averaging 4% annually), roughly twice the state's growth rate. Local unemployment levels are down on a year-over-year basis at 6.7% in May 2011 from a recent peak of 7.1% in 2010, remaining well below the state and national rates of 7.9% and 8.7%, respectively.

The district's tax base is substantial and generally diverse at roughly $125 billion in market value with no more than 4% of TAV coming from the ten largest taxpayers (primarily technology firms). Successful annexation elections in various local school districts have also increased district's tax base. Given the overall weaker economic conditions and housing market, strong TAV gains in fiscal years 2006-2010 reversed course with a modest 4% decline in fiscal 2011. While flat TAV would otherwise be anticipated for fiscal 2012, district officials report a projected 4% gain with the addition of taxable value from the recently annexed Elgin and Hays school districts into the ACC tax base. Comparable TAV growth is projected over the near term.

Given recently successful annexation elections, a growing majority of ACC students (approximately 70%) originate from within the district's taxing boundaries (coterminous with seven area school districts). Most students are part-time. Measured by both full-time student equivalents (FTSEs) and contact hours, annual enrollment gains have generally been consistent; however, enrollment in fiscal year 2010 grew at a rapid, double-digi pace in light of weaker economic conditions that typically drive higher levels of enrollment at community colleges. FTSE growth averaged nearly 6.5% annually in fiscal years 2005-2010, reaching about 19,200 in fiscal year 2010. Tuition rates remain affordable and attractive in recruiting students; despite recent increases, rates are roughly 1/3 the cost of tuition at the University of Texas' flagship Austin campus. With solid gains reported in fiscal 2011, prospects for continued, strong enrollment growth appear favorable, given the slower pace of economic recovery currently anticipated, demographic trends of the service area, and the potential for added enrollment through annexation.

ACC benefits from a diverse revenue stream, which includes property taxes for operations and debt service (the largest revenue source at almost 38% or $104.5 million in fiscal 2010), state appropriations, federal revenue, and tuition/fees. Federal revenues for Pell grants have trending upwards since fiscal 2008, equaling approximately $40 million or a high 85% of federal revenues in fiscal 2010. Although Pell grant funding levels have increased, the district remains vulnerable to shifts in the level of federal support for this discretionary program. Financial performance remains sound, although positive operating margins have thinned due largely to recent growth pressures. Operating margins in both fiscal 2009 and fiscal 2010 equaled 2.6% of total operating/non-operating revenues, which was down from stronger margins that ranged from 6%-7% during fiscal years 2007-2008. Liquidity levels, as measured by available funds, were down from prior years but adequate at approximately 32% of annual operating expense in fiscal 2010.

Year-to-date fiscal 2011 financial performance remains generally balanced according to management; revenues generated from the 6% enrollment growth that was slightly higher than budgeted helped the district manage a 2.5% mid-cycle state appropriation cut for all community colleges in the state. A modest $1.5 million draw on reserves is anticipated and year-end reserves are expected to total approximately $55 million in unrestricted cash (which is nearly double the district's policy to maintain 8%--or one month-- of spending in reserve). Fitch notes positively management's recent decision to strengthen its formal reserve policy to require nearly 17% or two months of spending; this change should provide added financial flexibility, given current operating and capital growth pressures under a capped operating tax rate.

For fiscal 2012, the $265 million operating budget was adopted with a surplus. Under conservative budget assumptions of 5% enrollment growth, tuition and fee increases that retain the district's competitive pricing along with cost efficiencies of approximately $3.5 million were implemented and are projected to offset the year's nearly $10 million or 15% reduction in state aid. As further reductions in state funding are not anticipated, management believes ACC is well positioned for fiscal 2013, given the aforementioned tuition and fee increases. For revenue-raising ability, the district is reliant on tuition and fee increases and growth in its tax base. Unlike many other Texas community colleges, ACC does not have additional financial flexibility in its available operating tax rate; the district has taxed at the local cap of $0.09 per $100 AV since fiscal 2007. Nonetheless, the district's overall tax rate has historically remained low and is yet to reach $0.10 per $100 of TAV, well below the state's statutory tax rate ceiling for community college districts of $1.00 (not to exceed $0.50 for debt service).

While overall debt levels approximate a moderately high 4% of market value or $3,600 per capita, ACC's direct debt burden is low and is expected to remain so, given the substantial value of its tax base. Principal amortization of tax-supported debt is slow at roughly 31% repaid in 10 years. Although ACC has no remaining bonding authority, a majority of the district's recent capital needs since the last election have been met through the issuance of revenue and lease revenue debt. Near-term capital projects include facilities for the newly annexed Elgin and Hays school districts, scheduled to open in 2013, along with the purchase and renovation of a local mall for office and classroom space.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's report 'Tax-Supported Rating Criteria', this action was additionally informed by information from Creditscope, University Financial Associates, LoanPerformance, Inc, and IHS (News - Alert) Global Insight.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 16, 2010);

--'U.S. Local Government Tax-Supported Rating Criteria' (Oct. 8, 2010);

--'U.S. College and University Rating Criteria' (July 14, 2011).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566

U.S. College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=640830

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

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